The S&P 500 Index jumped 9.5% from the mid-February low as of last night’s close. That’s a sizable rebound that has investors wondering whether the bottom is in, or if this is just another bear-market trap poised to spring on unwary investors.

While the outcome is still uncertain, one factor that has me worried is the growing disconnect between the Federal Reserve’s interest-rate policy intentions and Wall Street’s expectations.

Ever since the Fed began the process of “normalizing” interest rates by hiking the Fed funds rate 0.25% in December, investors have been busy handicapping the likely path of future rate hikes. With every piece of economic data, good or bad, interest-rate forecasts rise or fall.

For its part, the Fed has largely stayed on course since raising rates three months ago. The Fed’s infamous “dot plot” published after the December policy meeting indicated four more quarter-point increases in the Fed funds rate by the end of this year, with benchmark rates rising to 1.375% by the end of this year.

All along, Wall Street economists, noting the weak global economy and growing financial market stress, have forecast a much slower and lower trajectory for interest-rates hikes.

A recent survey of economists called for just two rate increases in 2016, with no better than a 50% chance that the next hike would come before November. Rate increases at next week’s Fed meeting and the next in June are considered low-probability if not off-the-table altogether.

And market-based expectations for the path of interest rates are even more benign.

As recently as mid-February, fed funds futures markets were pricing in only an 11% chance of even a single rate hike anytime this year. After last week’s better-than-expected jobs report, those odds increased slightly, but markets are still pricing just a 50/50 chance of a Fed rate hike before September.

That’s a long way away, and there are four more Fed policy meetings (including next week’s) between now and then.

This is a giant disconnect between market perception and Fed reality. And it could easily derail this rally if the Fed unexpectedly hikes rates sooner, and the markets throw another temper-tantrum as a result.

Currently there is a zero percent chance of an interest-rate increase at next week’s Fed meeting, but there could be plenty of drama contained in the Fed’s revised outlook and forecast for the future path of rate hikes.

Beware the ides of March, and next week’s plot of the dots.

Good investing,

Mike Burnick

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Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.

{9 comments }

AlThursday, March 10, 2016 at 9:49 am

I am certain that institutional investors are caught up in “handicapping” their moves, however, individual investors rarely have the time nor the wear withal to do so. Brokerage firms will and do make suggestions to their wealthy clients, yet the majority of us rely on publications, newsletters, paid investment services, and online free services to peruse the market indicators in order to make decisions regarding potential portfolio adjustments.

Ted FThursday, March 10, 2016 at 10:08 am

Will the rally continue? Will the Fed hike rates? Will the jobs report continue to show gains? Will consumer spending increase enough to buy overstocked inventories? Will the sub-prime auto loans tank like the housing market recently? Will Detroit continue to push iron? Will oil prices shoot up or drop further? Stay tuned for this and more on “As The Market Lurches”.

The Fed and other Central Bankers are becoming less and less important as investors see their policies fail, fail, fail. Rates in Europe go to zero today and the market tanks…3 years ago there would have been a 3 week rally. People are totally jaded by these numbskulls and their 3rd party manipulation. But they will continue their efforts to further destabilize until the economy gyrates out of control. When will we ever fire the Fed?

LenGThursday, March 10, 2016 at 3:41 pm

The question I have is, is this run-up the work of artificial intelligence engines on black boxes simulating real players. Does someone here know how to make that determination analytically? I know the ability exists. I know the motive is there (LOL). My less than analytic belief is – yes. AI on short stubs off wall st.
BTW I love will’s comments.

Thursday, March 10, 2016 at 5:23 pm

delete me if you want, you got the message. pitiful the way the attention is rigged towards certain individuals, while others don’t have a clue what’s happening behind their back.

badger 10Thursday, March 10, 2016 at 5:48 pm

How longer do we have to believe that low interest rates stimulate growth. All we are doing is adding more debt and that will not sustain growth. Until we start to pay down our climbing debt I maintain a bearish attitude on the economy and the stock market. The longer the market remains at these higher levels, the lower it will go eventually. We need both fiscal and monetary policy to have a real recovery.Good trading all.

terryThursday, March 10, 2016 at 9:14 pm

Again who is ‘Wall Street’ not buying it ? If only we knew more of them we may be able to beat them until everything is fair again. Oh but it is due to their benefiting from easy money from the fed with no real pay back. So if they are actually in charge then why don’t they dictate all outcome from the FED and if so then everyone has a problem.